Wednesday, June 11, 2008

Unusual Chart of the Month: VXO and RVX

In the past, I have been accused of dreaming up strange and unusual charts just for the fun of it. I will gladly enter a guilty plea on that one. In fact, I enjoy cajoling the Department of Strange and Unusual Charts to come up with something that readers have never encountered before.

If the chart below looks a little out of the ordinary, chalk it up to that personality disorder I have already confessed to. Before trying to interpret whether the chart has any possible validity, it is important to take a step back. Consider that each chart contains at least one hypothesis about a relationship between various data points and/or data sets. At first glance that hypothesis might seem outrageous or merely coincidental. The point of the strange and unusual charts is that it is more important to drag those hypotheses out into the open and give readers an opportunity to pause and reflect on them than it is to present each hypothesis as unassailable .

In the long run, it is those strange and unusual relationships that no one else sees, but which persist over time, that provide a meaningful trading edge. So keep an open mind and keep looking.

Turning to the ratio of the VXO to the RVX, recall that the VXO is the ‘original VIX’ and reflects the volatility associated with the large cap S&P 100 index (OEX). The RVX, on the other hand, is the volatility index for the Russell 2000 small cap index (RUT). Small caps have been outperforming large caps lately, so it is not surprising to see recent volatility trending higher with the large caps. What did surprise me, however, was to see that a spike in the VXO relative to the RVX has been an excellent indicator of market bottoms over the past two years. If we extrapolate from the past, the current levels of the VXO versus the RVX also suggest a likely intermediate market bottom, at least in the SPX, which is represented by a gray area chart in the graph. Unassailable? No. Worth watching going forward? Absolutely.

10 comments:

Anonymous said...

Hi Bill,

Awesome blog but , i am a little confused with tonights post. Maybe it is that I can't see the chart that well. It is partially cutoff. Also don't you have a wine section ? Can you reccomend a good red zin for fathers day ? thanks

Dave

ron said...

Lowest readings for the last month tend to denote weakness or small swing tops occurring over the next couple of days.

Bill Luby said...

Thanks for the comments, anon and Ron.

Anon, I'm afraid my graphics are not compatible with all monitors. Sorry for the inconvenience.

The easiest workaround is to right click on the image, highlight "Copy Image Location," and paste the link into a new browser window.

Regarding a zin, when I started this blog it was much more playful and less serious. Someone suggested that I should include a wine pairing with my VIX Weekly Sentiment Indicator (VWSI) and I obliged for a number of months, but it seemed like it might be getting old, so I dropped it.

Still, I am a big fan of zins. The Ridge zins are great celebration wines. My particular favorite is the Lytton Springs, which is widely available. A little more obscure and a recent favorite is Storybrook Mountain - Napa Mayacamas Range. I have not had the 2006, but I am a big fan of the 2004 and 2005 vintages.

Of course, you can always get both. After all, it is Father's Day...

Cheers,

-Bill

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